MASONITE INTERNATIONAL CORP - Quarter Report: 2021 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-11796
____________________________
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Masonite International Corporation
(Exact name of registrant as specified in its charter)
____________________________
| British Columbia, Canada | 98-0377314 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
2771 Rutherford Road
Concord, Ontario L4K 2N6 Canada
(Address of principal executive offices)
(800) 895-2723
(Registrant's telephone number, including area code)
____________________________
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Common Stock (no par value) | DOOR | New York Stock Exchange | ||||||
| (Title of class) | (Trading symbol) | (Name of exchange on which registered) | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
The registrant had outstanding 24,500,806 shares of Common Stock, no par value, as of April 30, 2021.
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MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 4, 2021
| PART I | Page | ||||||||||
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| Item 3 | |||||||||||
| Item 4 | |||||||||||
| PART II | |||||||||||
| Item 1 | |||||||||||
| Item 1A | |||||||||||
| Item 2 | |||||||||||
| Item 3 | |||||||||||
| Item 4 | |||||||||||
| Item 5 | |||||||||||
| Item 6 | |||||||||||
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "might," "could," "will," "would," "should," "expect," "believes," "outlook," "predict," "forecast," "objective," "remain," "anticipate," "estimate," "potential," "continue," "plan," "project," "targeting," and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" in our Annual Report on Form 10-K for the year ended January 3, 2021, subsequent reports on Form 10-Q, and elsewhere in this Quarterly Report.
The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:
•downward trends in our end markets and in economic conditions;
•reduced levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity due to increases in mortgage rates, changes in mortgage interest deductions and related tax changes and reduced availability of financing;
•competition;
•the continued success of, and our ability to maintain relationships with, certain key customers in light of customer concentration and consolidation;
•our ability to accurately anticipate demand for our products including seasonality;
•scale and scope of the coronavirus ("COVID-19") pandemic and its impact on our operations, customer demand and supply chain;
•increases in prices of raw materials and fuel;
•tariffs and evolving trade policy and friction between the United States and other countries, including China, and the impact of anti-dumping and countervailing duties;
•increases in labor costs, the availability of labor or labor relations (i.e., disruptions, strikes or work stoppages);
•our ability to manage our operations including potential disruptions, manufacturing realignments (including related restructuring charges) and customer credit risk;
•product liability claims and product recalls;
•our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations and to meet our debt service obligations, including our obligations under our senior notes and our asset-based revolving credit facility ("ABL Facility");
•limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and ABL Facility;
•fluctuating foreign exchange and interest rates;
•our ability to replace our expiring patents and to innovate, keep pace with technological developments and successfully integrate acquisitions;
•the continuous operation of our information technology and enterprise resource planning systems and management of potential cyber security threats and attacks;
•political, economic and other risks that arise from operating a multinational business;
•uncertainty relating to the United Kingdom's exit from the European Union;
•retention of key management personnel; and
•environmental and other government regulations, including the United States Foreign Corrupt Practices Act ("FCPA"), and any changes in such regulations.
We caution you that the foregoing list of important factors is not all-inclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
ii
The Company may use its website and/or social media outlets, such as LinkedIn, as distribution channels of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at http://investor.masonite.com and its LinkedIn page at https://www.linkedin.com/company/masonitedoors/mycompany/. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at http://investor.masonite.com.
iii
PART I – FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Net sales | $ | 646,337 | $ | 551,228 | |||||||
| Cost of goods sold | 487,699 | 416,947 | |||||||||
| Gross profit | 158,638 | 134,281 | |||||||||
| Selling, general and administration expenses | 83,631 | 80,333 | |||||||||
| Restructuring costs | 1,643 | 1,941 | |||||||||
| Operating income | 73,364 | 52,007 | |||||||||
| Interest expense, net | 11,946 | 11,282 | |||||||||
| Other (income) expense, net | (1,343) | 49 | |||||||||
| Income before income tax expense | 62,761 | 40,676 | |||||||||
| Income tax expense | 14,613 | 9,639 | |||||||||
| Net income | 48,148 | 31,037 | |||||||||
| Less: net income attributable to non-controlling interests | 1,167 | 1,152 | |||||||||
| Net income attributable to Masonite | $ | 46,981 | $ | 29,885 | |||||||
| Basic earnings per common share attributable to Masonite | $ | 1.92 | $ | 1.20 | |||||||
| Diluted earnings per common share attributable to Masonite | $ | 1.89 | $ | 1.19 | |||||||
| Comprehensive income (loss): | |||||||||||
| Net income | $ | 48,148 | $ | 31,037 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation gain (loss) | 2,228 | (38,687) | |||||||||
| Amortization of actuarial net losses | 334 | 173 | |||||||||
| Income tax expense related to other comprehensive income (loss) | (54) | (89) | |||||||||
| Other comprehensive income (loss), net of tax: | 2,508 | (38,603) | |||||||||
| Comprehensive income (loss) | 50,656 | (7,566) | |||||||||
| Less: comprehensive income attributable to non-controlling interests | 1,338 | 573 | |||||||||
| Comprehensive income (loss) attributable to Masonite | $ | 49,318 | $ | (8,139) | |||||||
See accompanying notes to the condensed consolidated financial statements.
1
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
| ASSETS | April 4, 2021 | January 3, 2021 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 323,198 | $ | 364,674 | |||||||
| Restricted cash | 10,560 | 10,560 | |||||||||
| Accounts receivable, net | 365,396 | 290,508 | |||||||||
| Inventories, net | 267,230 | 260,962 | |||||||||
| Prepaid expenses and other assets | 37,497 | 42,538 | |||||||||
| Income taxes receivable | 5,498 | 1,124 | |||||||||
| Total current assets | 1,009,379 | 970,366 | |||||||||
| Property, plant and equipment, net | 616,872 | 625,126 | |||||||||
| Operating lease right-of-use assets | 152,881 | 146,806 | |||||||||
| Investment in equity investees | 14,923 | 14,636 | |||||||||
| Goodwill | 139,728 | 138,692 | |||||||||
| Intangible assets, net | 165,620 | 169,392 | |||||||||
| Deferred income taxes | 20,448 | 25,331 | |||||||||
| Other assets | 50,801 | 47,411 | |||||||||
| Total assets | $ | 2,170,652 | $ | 2,137,760 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 114,259 | $ | 97,211 | |||||||
| Accrued expenses | 250,058 | 277,716 | |||||||||
| Income taxes payable | 4,395 | 11,086 | |||||||||
| Total current liabilities | 368,712 | 386,013 | |||||||||
| Long-term debt | 791,628 | 792,242 | |||||||||
| Long-term operating lease liabilities | 140,642 | 136,235 | |||||||||
| Deferred income taxes | 77,967 | 73,073 | |||||||||
| Other liabilities | 54,550 | 55,080 | |||||||||
| Total liabilities | 1,433,499 | 1,442,643 | |||||||||
| Commitments and Contingencies (Note 7) | |||||||||||
| Equity: | |||||||||||
Share capital: unlimited shares authorized, no par value, 24,500,706 and 24,422,934 shares issued and outstanding as of April 4, 2021, and January 3, 2021, respectively | 561,776 | 552,969 | |||||||||
| Additional paid-in capital | 214,689 | 223,666 | |||||||||
| Accumulated earnings | 59,712 | 20,385 | |||||||||
| Accumulated other comprehensive loss | (109,726) | (112,063) | |||||||||
| Total equity attributable to Masonite | 726,451 | 684,957 | |||||||||
| Equity attributable to non-controlling interests | 10,702 | 10,160 | |||||||||
| Total equity | 737,153 | 695,117 | |||||||||
| Total liabilities and equity | $ | 2,170,652 | $ | 2,137,760 | |||||||
See accompanying notes to the condensed consolidated financial statements.
2
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Total equity, beginning of period | $ | 695,117 | $ | 636,862 | |||||||
| Share capital: | |||||||||||
| Beginning of period | 552,969 | 558,514 | |||||||||
| Common shares issued for delivery of share based awards | 9,931 | 5,490 | |||||||||
| Common shares issued under employee stock purchase plan | 824 | 708 | |||||||||
| Common shares repurchased and retired | (1,948) | (12,729) | |||||||||
| End of period | 561,776 | 551,983 | |||||||||
| Additional paid-in capital: | |||||||||||
| Beginning of period | 223,666 | 216,584 | |||||||||
| Share based compensation expense | 4,418 | 3,470 | |||||||||
| Common shares issued for delivery of share based awards | (9,931) | (5,490) | |||||||||
| Common shares withheld to cover income taxes payable due to delivery of share based awards | (3,281) | (1,427) | |||||||||
| Common shares issued under employee stock purchase plan | (183) | (311) | |||||||||
| End of period | 214,689 | 212,826 | |||||||||
| Accumulated earnings (deficit): | |||||||||||
| Beginning of period | 20,385 | (20,047) | |||||||||
| Net income attributable to Masonite | 46,981 | 29,885 | |||||||||
| Common shares repurchased and retired | (7,654) | (22,041) | |||||||||
| End of period | 59,712 | (12,203) | |||||||||
| Accumulated other comprehensive loss: | |||||||||||
| Beginning of period | (112,063) | (130,169) | |||||||||
| Other comprehensive income (loss) attributable to Masonite, net of tax | 2,337 | (38,024) | |||||||||
| End of period | (109,726) | (168,193) | |||||||||
| Equity attributable to non-controlling interests: | |||||||||||
| Beginning of period | 10,160 | 11,980 | |||||||||
| Net income attributable to non-controlling interests | 1,167 | 1,152 | |||||||||
| Other comprehensive income (loss) attributable to non-controlling interests, net of tax | 171 | (579) | |||||||||
| Dividends to non-controlling interests | (796) | (710) | |||||||||
| End of period | 10,702 | 11,843 | |||||||||
| Total equity, end of period | $ | 737,153 | $ | 596,256 | |||||||
| Common shares outstanding: | |||||||||||
| Beginning of period | 24,422,934 | 24,869,921 | |||||||||
| Common shares issued for delivery of share based awards | 154,458 | 134,911 | |||||||||
| Common shares issued under employee stock purchase plan | 8,297 | 9,426 | |||||||||
| Common shares repurchased and retired | (84,983) | (567,271) | |||||||||
| End of period | 24,500,706 | 24,446,987 | |||||||||
See accompanying notes to the condensed consolidated financial statements.
3
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
| Three Months Ended | |||||||||||
| Cash flows from operating activities: | April 4, 2021 | March 29, 2020 | |||||||||
| Net income | $ | 48,148 | $ | 31,037 | |||||||
| Adjustments to reconcile net income to net cash flow provided by operating activities: | |||||||||||
| Depreciation | 18,279 | 16,018 | |||||||||
| Amortization | 4,918 | 6,459 | |||||||||
| Share based compensation expense | 4,418 | 3,470 | |||||||||
| Deferred income taxes | 10,143 | 6,160 | |||||||||
| Unrealized foreign exchange (gain) loss | (253) | 94 | |||||||||
| Share of income from equity investees, net of tax | (287) | (911) | |||||||||
| Pension and post-retirement funding, net of expense | (1,631) | (1,900) | |||||||||
| Non-cash accruals and interest | 421 | 427 | |||||||||
| (Gain) loss on sale of property, plant and equipment | (597) | 1,622 | |||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | (74,132) | (37,990) | |||||||||
| Inventories | (5,681) | (5,388) | |||||||||
| Prepaid expenses and other assets | 5,130 | (491) | |||||||||
| Accounts payable and accrued expenses | (9,838) | (15,163) | |||||||||
| Other assets and liabilities | (13,363) | 2,602 | |||||||||
| Net cash flow (used in) provided by operating activities | (14,325) | 6,046 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant and equipment | (13,930) | (17,246) | |||||||||
| Acquisition of businesses, net of cash acquired | (160) | — | |||||||||
| Proceeds from sale of property, plant and equipment | 2,335 | 15 | |||||||||
| Other investing activities | (559) | (587) | |||||||||
| Net cash flow used in investing activities | (12,314) | (17,818) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of long-term debt | (945) | (57) | |||||||||
| Tax withholding on share based awards | (3,281) | (1,427) | |||||||||
| Distributions to non-controlling interests | (796) | (710) | |||||||||
| Repurchases of common shares | (9,602) | (34,770) | |||||||||
| Net cash flow used in financing activities | (14,624) | (36,964) | |||||||||
| Net foreign currency translation adjustment on cash | (213) | (3,853) | |||||||||
| Decrease in cash, cash equivalents and restricted cash | (41,476) | (52,589) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 375,234 | 177,608 | |||||||||
| Cash, cash equivalents and restricted cash, at end of period | $ | 333,758 | $ | 125,019 | |||||||
See accompanying notes to the condensed consolidated financial statements.
4
MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business Overview and Significant Accounting Policies
Unless we state otherwise or the context otherwise requires, references to "Masonite," "we," "our," "us" and the "Company" in these notes to the condensed consolidated financial statements refer to Masonite International Corporation and its subsidiaries.
Description of Business
Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 61 manufacturing and distribution facilities in eight countries and sells doors to customers throughout the world with our largest markets being the United States, Canada and the United Kingdom.
Basis of Presentation
We prepare these unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements; therefore, actual results could differ from those estimates. Interim results are not necessarily indicative of the results for a full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2021, as filed with the SEC. Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods and the 52- or 53-week periods are referred to as year.
Changes in Accounting Standards and Policies
There have been no changes in the significant accounting policies from those that were disclosed in the fiscal year 2020 audited consolidated financial statements, other than as noted below.
Adoption of Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. We have adopted the new guidance prospectively as of January 4, 2021, the beginning of fiscal year 2021, and the adoption did not have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans," which amended ASC 715, "Compensation—Retirement Benefits." This standard is applicable for employers that sponsor defined benefit pension or other postretirement plans, and eliminates disclosures no longer considered cost beneficial, clarifies specific disclosure requirements for entities that provide aggregate disclosures for two or more plans and adds requirements for explanations for significant gains and losses related to changes in benefit obligations. We adopted the new guidance using a retrospective approach as of January 3, 2021, the end of fiscal year 2020, and the adoption did not have a material impact on our financial statements or disclosures.
5
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)”, which replaced the incurred loss methodology for recognizing credit losses with a current expected credit losses model. This standard applied to most financial assets, including trade receivables. Our prior accounts receivable policy is described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. We adopted the new guidance using a modified retrospective approach as of December 30, 2019, the beginning of fiscal year 2020, and the adoption did not have a material impact on our financial statements and no adjustment was necessary to retained earnings on December 30, 2019.
2. Acquisitions and Divestitures
Acquisitions
On December 4, 2020, we completed the acquisition of a Lowe's Companies, Inc. door fabrication facility in the United States for cash consideration of $3.9 million. During the first quarter of 2021, as a result of working capital adjustments we paid an additional $0.2 million. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for the acquisition are not presented as they were not material for any period presented.
On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for the acquisition are not presented as they were not material for any period presented.
Divestitures
During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries. The total charge consists of $2.3 million relating to the recognition of cumulative translation adjustment out of accumulated other comprehensive loss and $0.2 million relating to the write-off of net assets and other professional fees.
3. Accounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our ten largest customers accounted for 61.3% and 53.1% of total accounts receivable as of April 4, 2021, and January 3, 2021, respectively. Our largest customer, The Home Depot, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of April 4, 2021 and January 3, 2021. In addition, we had one other retail customer that accounted for more than 10% of the consolidated gross accounts receivable balance as of April 4, 2021. The allowance for doubtful accounts balance was $2.6 million and $2.8 million as of April 4, 2021, and January 3, 2021, respectively.
We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).
6
4. Inventories
The amounts of inventory on hand were as follows as of the dates indicated:
| (In thousands) | April 4, 2021 | January 3, 2021 | |||||||||
| Raw materials | $ | 195,119 | $ | 191,784 | |||||||
| Finished goods | 78,795 | 75,483 | |||||||||
| Provision for obsolete or aged inventory | (6,684) | (6,305) | |||||||||
| Inventories, net | $ | 267,230 | $ | 260,962 | |||||||
5. Accrued Expenses
The details of our accrued expenses were as follows as of the dates indicated:
| (In thousands) | April 4, 2021 | January 3, 2021 | |||||||||
| Accrued payroll | $ | 58,604 | $ | 86,517 | |||||||
| Accrued rebates | 54,384 | 49,531 | |||||||||
| Current portion of operating lease liabilities | 24,876 | 22,667 | |||||||||
| Accrued interest | 5,410 | 16,435 | |||||||||
| Accrued legal settlement | 40,000 | 40,000 | |||||||||
| Other accruals | 66,784 | 62,566 | |||||||||
| Total accrued expenses | $ | 250,058 | $ | 277,716 | |||||||
6. Long-Term Debt
| (In thousands) | April 4, 2021 | January 3, 2021 | |||||||||
| 5.375% senior unsecured notes due 2028 | $ | 500,000 | $ | 500,000 | |||||||
| 5.750% senior unsecured notes due 2026 | 300,000 | 300,000 | |||||||||
| Debt issuance costs | (8,372) | (8,694) | |||||||||
| Other long-term debt | — | 936 | |||||||||
| Total long-term debt | $ | 791,628 | $ | 792,242 | |||||||
Interest expense related to our consolidated indebtedness under senior unsecured notes was $11.4 million and $11.3 million for the three months ended April 4, 2021 and March 29, 2020, respectively.
5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes bear interest at 5.375%, payable in cash semiannually in arrears on February 1 and August 1 of each year and are due February 1, 2028. The 2028 Notes were issued at par.
Information concerning obligations under the 2028 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the indenture governing the 2028 Notes.
5.750% Senior Notes due 2026
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"). The 2026 Notes bear interest at 5.750% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due September 15, 2026. The 2026 Notes were issued at par.
7
Information concerning obligations under the 2026 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the indenture governing the 2026 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the United States, Canadian or United Kingdom Base Rate (each as defined in the credit agreement relating to the ABL Facility, the "Amended and Restated Credit Agreement") plus a margin ranging from 0.25% to 0.50% per annum, or (ii) the Adjusted LIBO Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.50% per annum. In addition to paying interest on any outstanding principal under the ABL Facility, a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $220.5 million under our ABL Facility and there were no amounts outstanding as of April 4, 2021.
7. Commitments and Contingencies
The following discussion describes material developments in previously disclosed legal proceedings that occurred since January 3, 2021. Refer to Note 10. Commitments and Contingencies in the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 3, 2021, for a full description of the previously disclosed legal proceedings.
Indemnifications
We have provided customary indemnifications to our landlords under certain property lease agreements for claims by third parties in connection with their use of the premises. We also have provided routine indemnifications against adverse effects related to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, we have recourse against other parties to mitigate the risk of loss from these indemnifications. Historically, we have not made any significant payments relating to such indemnifications.
Antitrust Class Action Proceedings - United States
With respect to the putative class action antitrust cases pending in the Eastern District of Virginia, the final Court approval hearing date for the direct purchaser settlement has been set for June 1, 2021, and the final approval hearing date for the indirect purchaser settlement has been set for July 13, 2021.
Class Action Proceedings - Canada
With respect to the putative class action antitrust case pending in Quebec, Canada, all parties in the Quebec proceeding filed a motion with the Quebec court seeking to stay the proceeding on December 22, 2020. The Quebec Court has not yet released its decision regarding this motion.
With respect to the putative class action antitrust case pending in the Federal Court of Canada, the plaintiff served its certification record on March 31, 2021. The parties will confer to prepare a mutually agreeable timeline for the steps leading up to the plaintiff's certification motion and will update the Federal Court by way of a case conference on or before May 31, 2021. We have not recognized an expense related to damages in connection with this matter because,
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although an adverse outcome is reasonably possible, the amount or range of any potential loss cannot be reasonably estimated.
While we intend to defend against these claims vigorously, there can be no assurance that the ultimate resolution of this litigation will not have a material, adverse effect on our consolidated financial condition or results of operations.
General
In addition to the above, from time to time, we are involved in various claims and legal actions, including but not limited to wage and hour and labor lawsuits. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
8. Share Based Compensation Plans
Share based compensation expense was $4.4 million and $3.5 million for the three months ended April 4, 2021 and March 29, 2020, respectively. As of April 4, 2021, the total remaining unrecognized compensation expense related to share based compensation amounted to $29.6 million, which will be amortized over the weighted average remaining requisite service period of 1.9 years.
Equity Incentive Plans
Our equity incentive plans under the 2009 Plan and the 2012 Plan are described in detail and defined in our Annual Report on Form 10-K for the year ended January 3, 2021. The aggregate number of common shares that can be issued with respect to equity awards under the 2012 Plan cannot exceed 2,000,000 shares plus the number of shares subject to existing grants under the 2009 Plan that may expire or be forfeited or canceled. As of April 4, 2021, there were 614,231 shares of common stock available for future issuance under the 2012 Plan.
On March 10, 2021, the Board of Directors adopted the Masonite International Corporation 2021 Omnibus Incentive Equity Plan (the "2021 Plan"), subject to approval by our shareholders at the Annual General Meeting of Shareholders on May 13, 2021. The 2021 Plan is effective for ten years from the date of adoption. The aggregate number of common shares that can be issued with respect to equity awards under the 2021 Plan cannot exceed 880,000 shares plus the number of shares reserved for the 2012 Plan that is in excess of the number of shares outstanding plus the number of shares subject to existing grants under the 2012 Plan that may expire or be forfeited or cancelled.
Deferred Compensation Plan
We offer to certain of our employees and directors a Deferred Compensation Plan, which is further described in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, the liability and asset relating to deferred compensation had a fair value of $8.0 million and $8.3 million, respectively. As of April 4, 2021, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs") to certain employees under both the 2009 Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of three years, have a life of ten years and settle in common shares. It is assumed that all time-based SARs will vest. We recognize forfeitures of SARs in the period in which they occur.
The total fair value of SARs vested was $0.7 million during the three months ended April 4, 2021.
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| Three Months Ended April 4, 2021 | Stock Appreciation Rights | Aggregate Intrinsic Value (in thousands) | Weighted Average Exercise Price | Average Remaining Contractual Life (Years) | |||||||||||||||||||
| Outstanding, beginning of period | 207,094 | $ | 7,409 | $ | 62.56 | 7.5 | |||||||||||||||||
| Granted | 28,707 | 107.68 | |||||||||||||||||||||
| Exercised | (11,240) | 664 | 52.32 | ||||||||||||||||||||
| Outstanding, end of period | 224,561 | $ | 11,469 | $ | 68.84 | 7.7 | |||||||||||||||||
| Exercisable, end of period | 120,764 | $ | 6,978 | $ | 62.14 | 6.7 | |||||||||||||||||
The value of SARs granted is determined using the Black-Scholes-Merton valuation model, and the corresponding expense is expected to be recognized over the average requisite service period of 2.0 years. Expected volatility is based upon the historical volatility of our common shares amongst other considerations. The expected term is calculated using the simplified method, due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:
2021 Grants | |||||
| SAR value (model conclusion) | $ | 28.08 | |||
| Risk-free rate | 0.8 | % | |||
| Expected dividend yield | 0.0 | % | |||
| Expected volatility | 25.2 | % | |||
| Expected term (years) | 6.0 | ||||
Restricted Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under the 2012 Plan. The RSUs confer the right to receive shares of our common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant, which is equal to the stock price on the date of grant, and is recognized over the requisite service period. The RSUs vest over a maximum of three years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be delivered once the blackout restriction has been lifted. It is assumed that all time-based RSUs will vest. We recognize forfeitures of RSUs in the period in which they occur.
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| Three Months Ended April 4, 2021 | Total Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding, beginning of period | 488,057 | $ | 68.15 | ||||||||
| Granted | 169,790 | 108.99 | |||||||||
Performance adjustment (1) | 14,474 | 63.05 | |||||||||
| Delivered | (149,818) | 67.62 | |||||||||
Withheld to cover (2) | (30,177) | ||||||||||
| Forfeited | (2,932) | 70.47 | |||||||||
| Outstanding, end of period | 489,394 | $ | 83.00 | ||||||||
____________
(1) Performance-based RSUs are presented as outstanding, granted and forfeited in the table above assuming targets are met and the awards pay out at 100%. These awards are settled with payouts ranging from zero to 200% of the target award value depending on achievement. The performance adjustment represents the difference in shares ultimately awarded due to performance attainment above or below target.
(2) A portion of the vested RSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
Approximately two-thirds of the RSUs granted during the three months ended April 4, 2021, vest at specified future dates with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs granted in the three months ended April 4, 2021, is being recognized over the weighted average requisite service period of 2.4 years. During the three months ended April 4, 2021, there were 179,995 RSUs vested at a fair value of $11.9 million.
9. Restructuring Costs
In November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and will continue through 2021. As of April 4, 2021, we expect to incur approximately $3 million to $4 million of additional charges related to the 2020 Plan.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and will continue through 2021. As of April 4, 2021, we expect to incur approximately $1 million to $2 million of additional charges related to the 2019 Plan.
During the fourth quarter of 2018, we began implementing a plan to reorganize and consolidate certain aspects of our United Kingdom head office function and optimize our portfolio by divesting non-core assets to enable more effective and consistent business processes in the Europe segment. In addition, in the North American Residential segment we announced a new facility that will optimize and expand capacity through increased automation, which resulted in the closure of one existing facility and related headcount reductions beginning in the second quarter of 2019 (collectively, the “2018 Plan”). Costs associated with the 2018 Plan included severance, retention and closure charges
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and continued throughout 2019. As of April 4, 2021, we do not expect to incur any material future charges related to the 2018 Plan.
The following tables summarize the restructuring charges recorded for the periods indicated:
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||
| (In thousands) | North American Residential | Architectural | Corporate & Other | Total | |||||||||||||||||||
| 2020 Plan | $ | — | $ | 1,514 | $ | — | $ | 1,514 | |||||||||||||||
| 2019 Plan | (361) | 339 | 151 | 129 | |||||||||||||||||||
| Total Restructuring Costs | $ | (361) | $ | 1,853 | $ | 151 | $ | 1,643 | |||||||||||||||
| Three Months Ended March 29, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| 2019 Plan | $ | 728 | $ | (37) | $ | 862 | $ | 267 | $ | 1,820 | |||||||||||||||||||
| 2018 Plan | 121 | — | — | — | 121 | ||||||||||||||||||||||||
| Total Restructuring Costs | $ | 849 | $ | (37) | $ | 862 | $ | 267 | $ | 1,941 | |||||||||||||||||||
Cumulative Amount Incurred Through April 4, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| 2020 Plan | $ | 29 | $ | — | $ | 3,247 | $ | — | $ | 3,276 | |||||||||||||||||||
| 2019 Plan | 8,961 | 359 | 2,010 | 2,218 | 13,548 | ||||||||||||||||||||||||
| 2018 Plan | 2,180 | 2,275 | — | — | 4,455 | ||||||||||||||||||||||||
| Total Restructuring Costs | $ | 11,170 | $ | 2,634 | $ | 5,257 | $ | 2,218 | $ | 21,279 | |||||||||||||||||||
The changes in the accrual for restructuring by activity were as follows for the periods indicated:
| (In thousands) | January 3, 2021 | Severance | Closure Costs | Cash Payments | April 4, 2021 | ||||||||||||||||||||||||
| 2020 Plan | $ | 1,492 | $ | 149 | $ | 1,365 | $ | (2,296) | $ | 710 | |||||||||||||||||||
| 2019 Plan | 291 | 85 | 44 | (294) | 126 | ||||||||||||||||||||||||
| Total | $ | 1,783 | $ | 234 | $ | 1,409 | $ | (2,590) | $ | 836 | |||||||||||||||||||
| (In thousands) | December 29, 2019 | Severance | Closure Costs | Cash Payments | March 29, 2020 | ||||||||||||||||||||||||
| 2019 Plan | $ | 1,535 | $ | 187 | $ | 1,633 | $ | (2,769) | $ | 586 | |||||||||||||||||||
| 2018 Plan | — | 103 | 18 | (121) | — | ||||||||||||||||||||||||
| Total | $ | 1,535 | $ | 290 | $ | 1,651 | $ | (2,890) | $ | 586 | |||||||||||||||||||
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10. Income Taxes
The effective tax rate differs from the Canadian statutory rate of 26.5% primarily due to mix of earnings in foreign jurisdictions that are subject to tax rates which differ from the Canadian statutory rate. In addition, we recognized $2.0 million of income tax benefit due to the exercise and delivery of share-based awards during the three months ended April 4, 2021, compared to $0.7 million of income tax benefit during the three months ended March 29, 2020.
11. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing earnings attributable to Masonite by the weighted average number of our common shares outstanding during the period. Diluted EPS is calculated by dividing earnings attributable to Masonite by the weighted average number of common shares plus the incremental number of shares issuable from non-vested and vested RSUs and SARs outstanding during the period.
| (In thousands, except share and per share information) | Three Months Ended | ||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Net income attributable to Masonite | $ | 46,981 | $ | 29,885 | |||||||
| Shares used in computing basic earnings per share | 24,469,653 | 24,861,442 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Incremental shares issuable under share compensation plans | 448,856 | 353,322 | |||||||||
| Shares used in computing diluted earnings per share | 24,918,509 | 25,214,764 | |||||||||
| Basic earnings per common share attributable to Masonite | $ | 1.92 | $ | 1.20 | |||||||
| Diluted earnings per common share attributable to Masonite | $ | 1.89 | $ | 1.19 | |||||||
| Anti-dilutive instruments excluded from diluted earnings per common share | 28,707 | 258,773 | |||||||||
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs and the conversion of all RSUs. The dilutive effect of such equity awards is calculated based on the weighted average share price for each fiscal period using the treasury stock method.
12. Segment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
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• registration and listing fees;
• restructuring costs;
• asset impairment;
• loss (gain) on disposal of subsidiaries;
• interest expense (income), net;
• loss on extinguishment of debt;
• other expense (income), net;
• income tax expense (benefit);
• other items;
• loss (income) from discontinued operations, net of tax; and
• net income (loss) attributable to non-controlling interest.
This definition of Adjusted EBITDA was updated in the third quarter of 2020 to exclude other items as these charges are not part of our underlying business performance. This change had no impact to Adjusted EBITDA for the three months ended March 29, 2020. This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indentures governing the 2028 Notes and 2026 Notes and the credit agreement governing the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
Certain information with respect to reportable segments is as follows for the periods indicated:
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | 477,229 | $ | 90,206 | $ | 78,074 | $ | 6,343 | $ | 651,852 | |||||||||||||||||||
| Intersegment sales | (765) | (1,667) | (3,083) | — | (5,515) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 476,464 | $ | 88,539 | $ | 74,991 | $ | 6,343 | $ | 646,337 | |||||||||||||||||||
| Adjusted EBITDA | $ | 94,482 | $ | 16,755 | $ | 1,994 | $ | (11,206) | $ | 102,025 | |||||||||||||||||||
| Three Months Ended March 29, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | 384,445 | $ | 71,156 | $ | 94,555 | $ | 5,427 | $ | 555,583 | |||||||||||||||||||
| Intersegment sales | (588) | (430) | (3,337) | — | (4,355) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 383,857 | $ | 70,726 | $ | 91,218 | $ | 5,427 | $ | 551,228 | |||||||||||||||||||
| Adjusted EBITDA | $ | 71,696 | $ | 9,679 | $ | 10,582 | $ | (10,440) | $ | 81,517 | |||||||||||||||||||
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A reconciliation of our net income attributable to Masonite to consolidated Adjusted EBITDA is set forth as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | April 4, 2021 | March 29, 2020 | |||||||||
| Net income attributable to Masonite | $ | 46,981 | $ | 29,885 | |||||||
| Plus: | |||||||||||
| Depreciation | 18,279 | 16,018 | |||||||||
| Amortization | 4,918 | 6,459 | |||||||||
| Share based compensation expense | 4,418 | 3,470 | |||||||||
| (Gain) loss on disposal of property, plant and equipment | (597) | 1,622 | |||||||||
| Restructuring costs | 1,643 | 1,941 | |||||||||
| Interest expense, net | 11,946 | 11,282 | |||||||||
| Other (income) expense, net | (1,343) | 49 | |||||||||
| Income tax expense | 14,613 | 9,639 | |||||||||
| Net income attributable to non-controlling interest | 1,167 | 1,152 | |||||||||
| Adjusted EBITDA | $ | 102,025 | $ | 81,517 | |||||||
13. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)
A rollforward of the components of accumulated other comprehensive loss is as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | April 4, 2021 | March 29, 2020 | |||||||||
| Accumulated foreign currency translation losses, beginning of period | $ | (93,684) | $ | (113,336) | |||||||
| Foreign currency translation gain (loss) | 2,228 | (38,687) | |||||||||
| Income tax benefit (expense) on foreign currency translation gain (loss) | 14 | (44) | |||||||||
| Less: foreign currency translation gain (loss) attributable to non-controlling interest | 171 | (579) | |||||||||
| Accumulated foreign currency translation losses, end of period | (91,613) | (151,488) | |||||||||
| Accumulated pension and other post-retirement adjustments, beginning of period | (18,379) | (16,833) | |||||||||
| Amortization of actuarial net losses | 334 | 173 | |||||||||
| Income tax expense on amortization of actuarial net losses | (68) | (45) | |||||||||
| Accumulated pension and other post-retirement adjustments | (18,113) | (16,705) | |||||||||
| Accumulated other comprehensive loss | $ | (109,726) | $ | (168,193) | |||||||
| Other comprehensive income (loss), net of tax | $ | 2,508 | $ | (38,603) | |||||||
| Less: other comprehensive income (loss) attributable to non-controlling interest | 171 | (579) | |||||||||
| Other comprehensive income (loss) attributable to Masonite | $ | 2,337 | $ | (38,024) | |||||||
Cumulative translation adjustments are reclassified out of accumulated other comprehensive loss into loss on disposal of subsidiaries in the condensed consolidated statements of comprehensive income (loss). Actuarial net losses
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are reclassified out of accumulated other comprehensive loss into cost of goods sold in the condensed consolidated statements of comprehensive income (loss).
Foreign currency translation gains as a result of translating our foreign assets and liabilities into U.S. dollars during the three months ended April 4, 2021, were $2.2 million, primarily driven by strengthening of the Pound Sterling and the Canadian Dollar, partially offset by weakening of the Euro in comparison to the U.S. Dollar during the period.
14. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | April 4, 2021 | March 29, 2020 | |||||||||
| Transactions involving cash: | |||||||||||
| Interest paid | $ | 22,247 | $ | 22,662 | |||||||
| Interest received | 25 | 641 | |||||||||
| Income taxes paid | 16,076 | 3,030 | |||||||||
| Income tax refunds | 438 | 392 | |||||||||
| Cash paid for operating lease liabilities | 7,345 | 6,835 | |||||||||
| Cash paid for finance lease liabilities | 327 | 317 | |||||||||
| Non-cash transactions from operating activities: | |||||||||||
| Right-of-use assets acquired under operating leases | 4,662 | 3,863 | |||||||||
The following reconciles total cash, cash equivalents and restricted cash as of the dates indicated:
| April 4, 2021 | January 3, 2021 | ||||||||||
| Cash and cash equivalents | $ | 323,198 | $ | 364,674 | |||||||
| Restricted cash | 10,560 | 10,560 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 333,758 | $ | 375,234 | |||||||
Property, plant and equipment additions in accounts payable were $2.7 million and $5.6 million as of April 4, 2021, and January 3, 2021, respectively.
15. Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, income taxes receivable, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short-term maturity of those instruments. The estimated fair values and carrying values of our long-term debt instruments were as follows for the periods indicated:
| April 4, 2021 | January 3, 2021 | ||||||||||||||||||||||
| (In thousands) | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||||||||
| 5.375% senior unsecured notes due 2028 | $ | 530,575 | $ | 494,579 | $ | 535,580 | $ | 494,393 | |||||||||||||||
| 5.750% senior unsecured notes due 2026 | $ | 313,098 | $ | 297,049 | $ | 315,972 | $ | 296,913 | |||||||||||||||
These estimates are based on market quotes and calculations based on current market rates available to us and are categorized as having Level 2 valuation inputs as established by the FASB's Fair Value Framework. Market quotes used in these calculations are based on bid prices for our debt instruments and are obtained from and corroborated with multiple independent sources. The market quotes obtained from independent sources are within the range of management's expectations.
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16. Subsequent Event
In May 2021, we initiated further actions to improve overall business performance that includes the reorganization of our manufacturing capacity in our Architectural reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the reorganization of these facilities and related headcount reductions began taking place in the second quarter of 2021 (collectively, the "2021 Plan").
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the three months ended April 4, 2021, and March 29, 2020. In this MD&A, "Masonite," "we," "us," "our" and the "Company" refer to Masonite International Corporation and its subsidiaries.
This discussion should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended January 3, 2021. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" elsewhere in this Quarterly Report on Form 10-Q. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties.
Overview
We are a leading global designer, manufacturer, marketer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order to better serve our customers and create sustainable competitive advantages, we focus on developing innovative products, advanced manufacturing capabilities and technology-driven sales and service solutions.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems.
We operate 61 manufacturing and distribution facilities in eight countries in North America, South America, Europe and Asia, which are strategically located to serve our customers through multiple distribution channels. These distribution channels include: (i) direct distribution to retail home center customers; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous door fabrication facilities provide value-added fabrication and logistical services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. In the three months ended April 4, 2021, we generated net sales of $476.5 million or 73.7%, $88.5 million or 13.7% and $75.0 million or 11.6% in our North American Residential, Europe and Architectural segments, respectively.
The COVID-19 pandemic impacted our business operations and financial results beginning in the second quarter of fiscal year 2020 and continues to impact us in fiscal year 2021. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. These impacts include, but are not limited to, the duration, spread, severity and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our employees, operations, customers, suppliers and supply chain, the remedial actions and stimulus measures adopted by federal, state and local governments and the extent to which normal economic and operating conditions can resume. Uncertainty associated with future forecasts, demand in the Architectural market and the duration of impacts from COVID-19 may impact our judgments and estimates and affect, among other things, our goodwill, long-lived assets and indefinite-lived intangible asset valuation,
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annual effective tax rate and inventory valuation, and may result in the need to write down goodwill in the Architectural reporting unit to its fair value in the future.
For discussion regarding the impact of COVID-19 and related economic conditions on our results for the year ended January 3, 2021, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations” in in our Annual Report on Form 10-K for the year ended January 3, 2021. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see “Risks Related to COVID-19” included in Part I, Item 1A, "Risk Factors” in our 2020 Annual Report.
Key Factors Affecting Our Results of Operations
Product Demand
There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
•the strength of the economy;
•the amount and type of residential and commercial construction;
•housing sales and home values;
•the age of existing home stock, home vacancy rates and foreclosures;
•non-residential building occupancy rates;
•increases in the cost of raw materials or wages or any shortage in supplies or labor;
•the availability and cost of credit;
•employment rates and consumer confidence; and
•demographic factors such as immigration and migration of the population and trends in household formation.
Product Pricing and Mix
The building products industry is highly competitive and we therefore face pressure on sales prices of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. In fiscal year 2020, our top ten customers together accounted for approximately 46% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 18% of our net sales. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.
Organizational Restructuring
Over the past several years, we have engaged in a series of restructuring programs related to exiting certain geographies and non-core businesses, consolidating certain internal support functions and engaging in other actions
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designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and lease termination costs. Management continues to evaluate our business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.
In November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and will continue through 2021. As of April 4, 2021, we expect to incur approximately $3 million to $4 million of additional charges related to the 2019 Plan. Once fully implemented, the actions taken as part of the 2020 Plan are expected to increase our annual earnings and cash flows by approximately $2 million.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and will continue through 2020. As of April 4, 2021, we expect to incur approximately $1 million to $2 million of additional charges related to the 2019 Plan. Once fully implemented, the actions taken as part of the 2019 Plan are expected to increase our annual earnings and cash flows by approximately $17 million to $21 million.
During the fourth quarter of 2018, we began implementing a plan to reorganize and consolidate certain aspects of our United Kingdom head office function and optimize our portfolio by divesting non-core assets to enable more effective and consistent business processes in the Europe segment. In addition, in the North American Residential segment we announced a new facility that will optimize and expand capacity through increased automation, which resulted in the closure of one existing facility and related headcount reductions beginning in the second quarter of 2019 (collectively, the “2018 Plan”). Costs associated with the 2018 Plan included severance, retention and closure charges and continued throughout 2019. As of April 4, 2021, we do not expect to incur any material future charges related to the 2018 Plan.
Inflation
In the first quarter of 2021, we realized higher costs in the wood product category as a result of macroeconomic factors as well as increased freight costs and wages. Additionally, we continued to recognize higher costs from previously disclosed anti-dumping and countervailing duties. We expect the macroeconomic pressures on wood, resins and other certain key product categories will continue throughout the remainder of fiscal year 2021. Our profitability, margins and net sales could be adversely affected if we are not able to pass these costs on to our customers or mitigate the impact of these inflationary pressures.
Seasonality
Our business is moderately seasonal and our net sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity.
Acquisitions and Divestitures
We are pursuing a strategic initiative of optimizing our global business portfolio. As part of this strategy, in the last several years we have pursued strategic acquisitions targeting companies who produce components for our existing operations, manufacture niche products and provide value-added services. Additionally, we target companies with strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. We also continuously analyze our operations to determine which businesses, market channels and products create the most value for our customers and acceptable returns for our shareholders.
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Acquisitions
•On December 4, 2020, we completed the acquisition of a Lowe's Companies, Inc. door fabrication facility in the United States for cash consideration of $3.9 million. During the first quarter of 2021, as a result of working capital adjustments we paid an additional $0.2 million.
•On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million.
Divestitures
•During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries.
Results of Operations
| Three Months Ended | |||||||||||
| (In thousands) | April 4, 2021 | March 29, 2020 | |||||||||
| Net sales | $ | 646,337 | $ | 551,228 | |||||||
| Cost of goods sold | 487,699 | 416,947 | |||||||||
| Gross profit | 158,638 | 134,281 | |||||||||
| Gross profit as a % of net sales | 24.5 | % | 24.4 | % | |||||||
| Selling, general and administration expenses | 83,631 | 80,333 | |||||||||
| Selling, general and administration expenses as a % of net sales | 12.9 | % | 14.6 | % | |||||||
| Restructuring costs | 1,643 | 1,941 | |||||||||
| Operating income | 73,364 | 52,007 | |||||||||
| Interest expense, net | 11,946 | 11,282 | |||||||||
| Other (income) expense, net | (1,343) | 49 | |||||||||
| Income before income tax expense | 62,761 | 40,676 | |||||||||
| Income tax expense | 14,613 | 9,639 | |||||||||
| Net income | 48,148 | 31,037 | |||||||||
| Less: net income attributable to non-controlling interests | 1,167 | 1,152 | |||||||||
| Net income attributable to Masonite | $ | 46,981 | $ | 29,885 | |||||||
Three Months Ended April 4, 2021, Compared with Three Months Ended March 29, 2020
Net Sales
Net sales in the three months ended April 4, 2021, were $646.3 million, an increase of $95.1 million or 17.3% from $551.2 million in the three months ended March 29, 2020. Net sales in the first quarter of 2021 were positively impacted by $11.3 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $83.8 million or 15.2% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the first quarter of 2021 by $76.3 million or 13.8% compared to the 2020 period. Net sales of components and other products to external customers increased $5.6 million or 1.0% in the first quarter of 2021 compared to the 2020 period. Higher volumes excluding the incremental impact of acquisitions and divestitures ("base volume") increased net sales by $1.9 million or 0.3% in the first quarter of 2021 compared to the 2020 period.
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Net Sales and Percentage of Net Sales by Reportable Segment
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Sales | $ | 477,229 | $ | 90,206 | $ | 78,074 | $ | 6,343 | $ | 651,852 | |||||||||||||||||||
| Intersegment sales | (765) | (1,667) | (3,083) | — | (5,515) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 476,464 | $ | 88,539 | $ | 74,991 | $ | 6,343 | $ | 646,337 | |||||||||||||||||||
| Percentage of consolidated external net sales | 73.7 | % | 13.7 | % | 11.6 | % | |||||||||||||||||||||||
| Three Months Ended March 29, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Sales | $ | 384,445 | $ | 71,156 | $ | 94,555 | $ | 5,427 | $ | 555,583 | |||||||||||||||||||
| Intersegment sales | (588) | (430) | (3,337) | — | (4,355) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 383,857 | $ | 70,726 | $ | 91,218 | $ | 5,427 | $ | 551,228 | |||||||||||||||||||
| Percentage of consolidated external net sales | 69.6 | % | 12.8 | % | 16.5 | % | |||||||||||||||||||||||
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the three months ended April 4, 2021, were $476.5 million, an increase of $92.6 million or 24.1% from $383.9 million in the three months ended March 29, 2020. Net sales in the first quarter of 2021 were positively impacted by $4.4 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $88.2 million or 23.0% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the first quarter of 2021 by $66.9 million or 17.4% compared to the 2020 period. Higher base volume increased net sales in the first quarter of 2021 by $17.3 million or 4.5% compared to the 2020 period. Net sales of components and other products to external customers were $4.0 million higher in the first quarter of 2021 compared to the 2020 period.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended April 4, 2021, were $88.5 million, an increase of $17.8 million or 25.2% from $70.7 million in the three months ended March 29, 2020. Net sales in the first quarter of 2021 were positively impacted by $6.4 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have increased by $11.4 million or 16.1% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the first quarter of 2021 by $5.0 million or 7.1% compared to the 2020 period. Higher base volume increased net sales by $4.9 million or 6.9% in the first quarter of 2021 compared to the 2020 period. Net sales of components and other products to external customers were $1.5 million higher in the first quarter of 2021 compared to the 2020 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended April 4, 2021, were $75.0 million, a decrease of $16.2 million or 17.8% from $91.2 million in the three months ended March 29, 2020. Net sales in the first quarter of 2021 were positively impacted by $0.5 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $16.7 million or 18.3% due to changes in volume, average unit price and sales of components and other products. Lower base volume decreased net sales in the first quarter of 2021 by $19.7 million or 21.6% compared to the 2020 period due to weakness in commercial end markets. Net sales of components and other products to external customers were $1.4 million lower in the first
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quarter of 2021 compared to the 2020 period. Average unit price increased net sales in the first quarter of 2021 by $4.4 million or 4.8% compared to the 2020 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 75.5% and 75.6% for the three months ended April 4, 2021, and March 29, 2020, respectively. Direct labor and depreciation as a percentage of sales in the first quarter of 2021 decreased by 0.7% and 0.5% compared to the first quarter of 2020. Distribution, overhead and material cost of sales as a percentage of net sales increased by 0.6%, 0.4%, 0.1% respectively, compared to the 2020 period. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by manufacturing wage inflation. The decrease in depreciation as a percentage of net sales was driven by higher average unit prices as compared to the 2020 period. Distribution as a percentage of net sales increased due to higher freight costs and higher personnel costs including wage inflation. Overhead as a percentage of net sales increased due to wage inflation and increased plant maintenance, partially offset by higher average unit prices as compared to the 2020 period. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in tariffs and freight costs, largely offset by higher average unit prices and material cost savings projects.
Selling, General and Administration Expenses
In the three months ended April 4, 2021, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 12.9%, as compared to 14.6% in the three months ended March 29, 2020, a decrease of 170 basis points.
SG&A expenses in the three months ended April 4, 2021, were $83.6 million, an increase of $3.3 million from $80.3 million in the three months ended March 29, 2020. The overall increase was driven by a $6.8 million increase in personnel costs primarily due to $3.9 million of resource investments to support growth, $1.5 million of payroll taxes due to timing of prior year incentive compensation and $1.4 million of incentive compensation, as well as unfavorable foreign exchange impacts of $1.2 million. These increases were partially offset by a $2.3 million decrease in professional and other fees, a $2.1 million decrease in travel expense and a $0.3 million decrease in non-cash items in SG&A expenses, including loss (gain) on disposal of property, plant and equipment, depreciation and amortization, deferred compensation and share based compensation.
Restructuring Costs
Restructuring costs in the three months ended April 4, 2021, and March 29, 2020, were $1.6 million and $1.9 million, respectively. Restructuring costs in the current year related primarily to the 2020 and 2019 Plans. Restructuring costs in the prior year period related primarily to the 2019 Plan.
Interest Expense, Net
Interest expense, net, in the three months ended April 4, 2021, was $11.9 million, compared to $11.3 million in the three months ended March 29, 2020, remaining relatively flat as compared to the 2020 period.
Other (Income) Expense, Net
Other (income) expense, net includes profits and losses related to our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting, unrealized gains and losses on foreign currency remeasurements, pension settlement charges and other miscellaneous non-operating expenses. Other (income) expense, net, in the three months ended April 4, 2021, was $1.3 million of income, compared to minimal expense in the three months ended March 29, 2020. The change in other (income) expense, net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust, partially offset by a change in our portion of the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting.
Income Tax Expense
Income tax expense in the three months ended April 4, 2021, was $14.6 million, compared to $9.6 million of income tax expense in the three months ended March 29, 2020. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate. We recognized
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discrete items resulting in $0.5 million of income tax benefit in the three months ended April 4, 2021, compared to $0.4 million of income tax benefit in the three months ended March 29, 2020.
Segment Information
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 94,482 | $ | 16,755 | $ | 1,994 | $ | (11,206) | $ | 102,025 | |||||||||||||||||||
| Adjusted EBITDA as a percentage of segment net sales | 19.8 | % | 18.9 | % | 2.7 | % | 15.8 | % | |||||||||||||||||||||
| Three Months Ended March 29, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 71,696 | $ | 9,679 | $ | 10,582 | $ | (10,440) | $ | 81,517 | |||||||||||||||||||
| Adjusted EBITDA as a percentage of segment net sales | 18.7 | % | 13.7 | % | 11.6 | % | 14.8 | % | |||||||||||||||||||||
The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net income (loss) attributable to Masonite | $ | 83,973 | $ | 11,408 | $ | (3,813) | $ | (44,587) | $ | 46,981 | |||||||||||||||||||
| Plus: | |||||||||||||||||||||||||||||
| Depreciation | 9,511 | 2,585 | 2,663 | 3,520 | 18,279 | ||||||||||||||||||||||||
| Amortization | 415 | 2,885 | 1,142 | 476 | 4,918 | ||||||||||||||||||||||||
| Share based compensation expense | — | — | — | 4,418 | 4,418 | ||||||||||||||||||||||||
| Loss (gain) on disposal of property, plant and equipment | 88 | (4) | 149 | (830) | (597) | ||||||||||||||||||||||||
| Restructuring costs | (361) | — | 1,853 | 151 | 1,643 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 11,946 | 11,946 | ||||||||||||||||||||||||
| Other (income) expense, net | — | (119) | — | (1,224) | (1,343) | ||||||||||||||||||||||||
| Income tax expense | — | — | — | 14,613 | 14,613 | ||||||||||||||||||||||||
| Net income attributable to non-controlling interest | 856 | — | — | 311 | 1,167 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 94,482 | $ | 16,755 | $ | 1,994 | $ | (11,206) | $ | 102,025 | |||||||||||||||||||
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| Three Months Ended March 29, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net income (loss) attributable to Masonite | $ | 58,811 | $ | 3,483 | $ | 4,580 | $ | (36,989) | $ | 29,885 | |||||||||||||||||||
| Plus: | |||||||||||||||||||||||||||||
| Depreciation | 9,364 | 2,457 | 2,822 | 1,375 | 16,018 | ||||||||||||||||||||||||
| Amortization | 595 | 3,562 | 1,922 | 380 | 6,459 | ||||||||||||||||||||||||
| Share based compensation expense | — | — | — | 3,470 | 3,470 | ||||||||||||||||||||||||
| Loss on disposal of property, plant and equipment | 1,204 | 3 | 396 | 19 | 1,622 | ||||||||||||||||||||||||
| Restructuring costs | 849 | (37) | 862 | 267 | 1,941 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 11,282 | 11,282 | ||||||||||||||||||||||||
| Other expense (income), net | — | 211 | — | (162) | 49 | ||||||||||||||||||||||||
| Income tax expense | — | — | — | 9,639 | 9,639 | ||||||||||||||||||||||||
| Net income attributable to non-controlling interest | 873 | — | — | 279 | 1,152 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 71,696 | $ | 9,679 | $ | 10,582 | $ | (10,440) | $ | 81,517 | |||||||||||||||||||
Adjusted EBITDA in our North American Residential segment increased $22.8 million, or 31.8%, to $94.5 million in the three months ended April 4, 2021, from $71.7 million in the three months ended March 29, 2020. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $19.2 million and $16.3 million, in the first quarter of 2021 and 2020, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Adjusted EBITDA in our Europe segment increased $7.1 million, or 73.2%, to $16.8 million in the three months ended April 4, 2021, from $9.7 million in the three months ended March 29, 2020. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $1.0 million and $0.3 million, in the first quarter of 2021 and 2020, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, marketing and share based compensation.
Adjusted EBITDA in our Architectural segment decreased $8.6 million, or 81.1%, to $2.0 million in the three months ended April 4, 2021, from $10.6 million in the three months ended March 29, 2020. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.8 million and $2.7 million, in the first quarter of 2021 and 2020, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Liquidity and Capital Resources
Our liquidity needs for operations vary throughout the year. Our principal sources of liquidity are cash flows from operating activities, the borrowings under our ABL Facility and an accounts receivable sales program with a third party ("AR Sales Program") and our existing cash balance. Our anticipated uses of cash in the near term include working capital needs, capital expenditures for critical maintenance, safety and regulatory projects, and share repurchases. On a continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.
We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of April 4, 2021, we had $323.2 million of cash and cash equivalents, availability under our ABL Facility of $220.5 million and availability under our AR Sales Program of $30.0 million.
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Cash Flows
Cash used in operating activities was $14.3 million during the three months ended April 4, 2021, compared to $6.0 million of cash provided by operating activities in the three months ended March 29, 2020. This $20.4 million decrease in cash provided by operating activities was due to changes in net working capital and a $16.0 million decrease in other assets and liabilities, partially offset by a $21.1 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first three months of 2021 compared to the same period in 2020.
Cash used in investing activities was $12.3 million during the three months ended April 4, 2021, compared to $17.8 million in the three months ended March 29, 2020. This $5.5 million decrease in cash used in investing activities was driven by a $3.3 million decrease in cash additions to property, plant and equipment and a $2.3 million increase in proceeds from the sale of property, plant and equipment, partially offset by a $0.1 million increase in cash used in acquisitions, net of cash acquired and other investing activities in the first three months of 2021 compared to the same period in 2020.
Cash used in financing activities was $14.6 million during the three months ended April 4, 2021, compared to $37.0 million during the three months ended March 29, 2020. This $22.3 million decrease in cash used in financing activities was driven by a $25.2 million decrease in cash used for repurchases of common shares, partially offset by a $1.9 million increase in cash used for tax withholding on share based awards, a $0.9 million increase in cash used for repayments of long-term debt and a $0.1 million increase in distributions to non-controlling interests in the first three months of 2021 compared to the same period in 2020.
Share Repurchases
We currently have in place a $600.0 million share repurchase authorization, stemming from three separate authorizations by our Board of Directors. During the three months ended April 4, 2021, we repurchased and retired 84,983 of our common shares in the open market at an aggregate cost of $9.6 million as part of the share repurchase programs. During the three months ended March 29, 2020, we repurchased 567,271 of our common shares in the open market at an aggregate cost of $34.8 million, prior to temporarily suspending our repurchase program on March 18, 2020. As of April 4, 2021, there was $90.7 million available for repurchase in accordance with the share repurchase programs.
Other Liquidity Matters
Our cash and cash equivalents balance includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of April 4, 2021, we do not believe adverse tax consequences exist that restrict our use of cash or cash equivalents in a material manner.
We also routinely monitor the changes in the financial condition of our customers and the potential impact on our results of operations. There has not been a change in the financial condition of any customer that has had a material adverse effect on our results of operations. However, if economic conditions were to deteriorate, it is possible there could be an impact on our results of operations in a future period and this impact could be material.
Accounts Receivable Sales Program
Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).
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5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as of April 4, 2021. The 2028 Notes bear interest at 5.375% per annum. The net proceeds from issuance of the 2028 Notes, together with available cash balances, were used to redeem the remaining $500.0 million aggregate principal amount of similar senior unsecured notes, including the payment of related premiums, fees and expenses. The 2028 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the indenture governing the 2028 Notes.
5.750% Senior Notes due 2026
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"), all of which were outstanding as of April 4, 2021. The 2026 Notes bear interest at 5.750% per annum. The 2026 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the indenture governing the 2026 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate which is described in more detail in Note 6. The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of April 4, 2021, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $220.5 million under our ABL Facility and there were no amounts outstanding as of April 4, 2021.
Supplemental Guarantor Financial Information
Our obligations under the 2028 Notes and 2026 Notes and the ABL Facility are fully and unconditionally guaranteed, jointly and severally, by certain of our directly or indirectly wholly-owned subsidiaries. The following unaudited supplemental financial information for our non-guarantor subsidiaries is presented:
Our non-guarantor subsidiaries generated external net sales of $569.2 million and $491.9 million for the three months ended April 4, 2021, and March 29, 2020, respectively. Our non-guarantor subsidiaries generated Adjusted EBITDA of $77.0 million and $68.4 million for the three months ended April 4, 2021, and March 29, 2020, respectively. Our non-guarantor subsidiaries had total assets of $2.2 billion as of April 4, 2021, and January 3, 2021, and total liabilities of $943.8 million and $935.3 million as of April 4, 2021, and January 3, 2021, respectively.
Changes in Accounting Standards and Policies
Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended January 3, 2021. We believe there have been no material changes to the information provided therein.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to
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management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found in Note 7. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1. Such information should be read in conjunction with the information contained under Part I, Item 3 "Legal Proceedings" included in our Annual Report on Form 10-K for the year ended January 3, 2021.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report on Form 10-K filed for the year ended January 3, 2021. There have been no material changes from the risk factors disclosed in such Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of Our Equity Securities.
During the three months ended April 4, 2021, we repurchased 84,983 of our common shares in the open market.
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||
| January 4, 2021, through January 31, 2021 | 200 | $ | 92.99 | 200 | $ | 100,304,106 | |||||||||||||||||
| February 1, 2021, through February 28, 2021 | — | — | — | 100,304,106 | |||||||||||||||||||
| March 1, 2021, through April 4, 2021 | 84,783 | 113.03 | 84,783 | 90,720,911 | |||||||||||||||||||
| Total | 84,983 | $ | 112.98 | 84,983 | |||||||||||||||||||
We currently have in place a $600.0 million share repurchase authorization, stemming from three separate authorizations by our Board of Directors. The share repurchase programs have no specified end date and the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. As of April 4, 2021, $90.7 million was available for repurchase in accordance with the share repurchase programs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
| Exhibit No. | Description | |||||||
| Amended and Restated Employment Agreement, dated as of December 31, 2018, by and between Masonite International Corporation and Robert E. Lewis (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on December 31, 2018 | ||||||||
| Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 101* | Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) the Registrant's Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended April 4, 2021, and March 29, 2020; (ii) the Registrant's Condensed Consolidated Balance Sheets as of April 4, 2021, and January 3, 2021; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three months ended April 4, 2021, and March 29, 2020; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows for the three months ended April 4, 2021, and March 29, 2020; and (v) the notes to the Registrant's Condensed Consolidated Financial Statements | |||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| * | Filed or furnished herewith. | |||||||
| # | Denotes management contract or compensatory plan. | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MASONITE INTERNATIONAL CORPORATION | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | May 5, 2021 | By | /s/ Russell T. Tiejema | |||||||||||
| Russell T. Tiejema | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||||||||
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